Fed Cut & Microsoft Ruling Spark Rally, Apple Gains

By Bryan Chaffin

Jun 27th, 2001 5:00 PM EDT

Todayis trading was all about a delayed reaction to yesterdayis rate cut and Microsoftis appellate victory/loss. In any event, the Dow and the Nasdaq both ended the day on a positive note with convincing volume. The Nasdaq traded 1.9 billion shares, and the Dow traded some 1.3 billion shares. The Nasdaq ended the day some 50 points higher (+2.44%), while the Dow gained 131 points (+1.26%).

First up, the interest rate cut. Investors and traders took a new look at yesterdayis 25 basis point cut in the Fed Funds rate. Yesterday, Wall Street reacted with some disappointment in the quarter point cut because they had been looking for a full 50 basis points (a half-point) cut. Today, the outlook shifted towards the fact that a quarter point cut indicated renewed confidence in the economy by the Fed as well as the fact the Fed still has room to cut if need be. From a Reuters report:

"The patterns evident in recent months -- declining profitability and business capital spending, weak expansion of consumption, and slowing growth abroad -- continue to weigh on the economy," the Federal Reserve said in a statement. The central bank said easing of pressures on labor and product markets are expected to keep inflation contained.

"There is nothing on the progress being made to reduce inventories, or the risk posed by the continued softness of asset prices, both of which figured in the April and May statements. Given the lack of detail, it is hard to know what prompted the switch from 50 to 25 basis points. We think this is the right decision -- though we expected 50 -- because the signs of incipient recovery should begin to emerge over the next few months," Shepherdson said.

Adding fuel to the rally was a ruling handed down by the U.S. Court of Appeals for the District of Columbia in the landmark Microsoft antitrust trial. The court vacated an order from Judge Thomas Penfield Jackson to break the company up due to their abuse of monopoly power. Microsoftis stock rallied on the news, though it fell back almost immediately before trading was halted. The court also upheld the finding that Microsoft was in fact an abusive monopoly, something that was slow to sink in the minds of analysts and investors alike. Microsoft, the Justice Department, and the 19 individual states who were a part of the case all attempted to put a positive spin on the news, and all were more or less correct. Microsoft won a partial victory in that its bundling of IE and Windows was found to be acceptable in the eyes of the court. Microsoft also has a much better chance of not being broken up considering some of the wording in the appellate ruling. However, Microsoft has been found to be an abusive monopoly, a fact that makes them susceptible to lawsuits from a ton of companies. They also will still face some sort of remedy from the new lower court, and that remedy could still include a break up. This news will continue to be digested by the Street and its impact tomorrow is unknown. Microsoft, the Justice Department, and the states attorneys general are also making more noise about a settlement.

Technology stocks all benefitted from the rally, however, including all but one of the stocks we track in the Stock Watch. There was a lot of talk about how Microsoftis gain will be its competitorsi pain, specifically AOL and Real. AOL closed at 52.08, a loss of 0.60 (-1.14%), and RealNetworks closed at 11.44, down 0.31 (-2.64%). Apple closed higher by 20 cents.

Apple opened up lower, but quickly reversed course to spend the rest of the day in positive territory. The stock briefly dipped when the Microsoft ruling was handed down, but again rallied. The stock traded in moderate volume with a range of 22.94 - 23.91.

Microsoft is being sued for patent infringement by InterTrust, with that company seeking to keep Windows XP from shipping. MSFT closed at 72.74, up 1.60 (+2.25%), on very strong volume of 64,524,500 shares trading hands.